What are the potential effects of the commercial duties Trump wants to impose?

The debate on them is coming back for good to the public debate as the president-elect of the United States plans to launch a new round of trade war. The US in a large part of the story taxed imports of products to a certain extent, before abandoning this policy, beginning in the 1930s, as government leaders adopted the idea of free trade. However, the high tariffs returned during Donald Trump’s presidency (2017-2021), which forced them in an attempt to revive American production and face what the US views as unfair commercial practices of China. Trump’s successor, Joe Biden, continued this trend. Now, Trump, who on November 5 won his candidacy for a second term at the White House, says he will dramatically increase taxes on imports and put them at the heart of his economic policy. His promise has revived a debate on whether tariffs are a valuable tool for competition with economic opponents or a political weapon with a troubled past that is likely to turn boomerang. What does Trump suggest? Donald Trump proposes raising tariffs to 60% for goods imported from China and 20% for those imported from the rest of the world. The US currently imposes tariffs at these levels or even higher in selected categories of goods, but imposing them at this level in all sectors would be a radical change. Currently, for imported industrial goods, which account for 94% of the value of American imports of goods, the country has a trade weighted average tax rate of 2%, according to the competent US trade services. This figure can be calculated by dividing the total value of imports with total tariff revenue. Half industrial goods enter the US without duty. According to an analysis by Bloomberg Economics published in October, Trump’s proposals on tariffs “would bring the average US taxation over 20%, a level that has not been observed since the early 20th century”. Could Trump unilaterally increase tariffs? According to Bloomberg’s report, yes, although in some cases it would be necessary to first find a finding from one of the federal agencies that speak to the president. Through charters, Congress has authorized the US president to modify tariffs to address various problems. These include the threat to national security, war or state of emergency, damage or potential damage to a U.S. industry and unfair commercial practices from a foreign country. While companies could try to challenge higher tariffs in courts, such challenges “will face a steep uphill”, according to an article published by the Center for Strategic and International Studies. How do customs work? The duty, known as the levy, is usually calculated as a percentage of the value of the goods, but may also be imposed as a fixed amount on each item. Goods crossing borders are given numerical codes within a standard nomenclature called the ‘International Harmonised System’. Customs duties may correspond to specific product codes, such as those for the framework of a truck, or to broad categories such as electric vehicles. Customs services shall collect customs duties on behalf of the governments. Who pays customs? The duties are actually paid by the importer or by an intermediary acting on behalf of the importer, although costs are usually passed on. Trump argues that exporters eventually pay the duties. Studies have shown that the burden is more diffuse. The foreign company producing the product may decide to reduce prices to appease the importer. Or he can spend considerable sums to build a factory somewhere else to circumvent the duty. Or an importer – Walmart and Target are among the largest in the US – could increase prices paid by consumers in the fund. How have the views on tariffs in the US evolved? The first American tariffs—a 5% tax on all imports—were signed as law in 1789 by President George Washington. The purpose was primarily to collect revenue for the newly created government and secondly to protect America’s hatched manufacturing industry from foreign competition, in order to diversify the US economy, which was largely agricultural. By about 1900, customs duties accounted for more than half of the American government’s revenue. As other types of taxes took their place, they became less important, and in addition, they began to be considered harmful. The effects of the 1930 Smoot-Hawley Act became the ‘evangelium’ against customs duties. The law was originally aimed at protecting American farmers, but expanded as well as other industries pressed for its accession. It led to an increase in import duties by about 20% on average, while it caused repayable duties from foreign governments, resulting in the fall of world trade and the Great Depression’s base. In 1934, President Franklin Roosevelt signed the Mutual Trade Agreements Act, which launched a new tariff reduction plan based on the belief that enhanced international trade would fuel the American economy. This act laid the foundations for the 1947 International General Agreement on Tariffs and Trade, a set of agreements aimed at abolishing trade barriers between countries. At this time that followed World War II, support for free trade between Western countries was fueled by the belief that trading partners would be less likely to wage war against each other. GATT was the precursor to the World Trade Organization (WTO), established in 1995. Based in Geneva, the WTO has 166 members representing 98% of world trade. While the WTO’s general objective is to reduce barriers to trade, it has rules on the imposition of duties, for example, when large quantities of products are “stuck” on the markets or when products are produced with the help of state subsidies. How is China involved in all this? Over the years, belief in free trade has been supported by a cross-party consensus in the US and by multinational companies who wanted access to cheap and effective supply chains abroad. But China’s emergence to global economic power shattered the consensus. As it was accepted at the WTO in 2001, China gained greater access to world markets, even when its critics say it violated the letter and spirit of free trade rules, for example by subsidizing its industries and forcing foreign companies operating in China to separate their know-how. Some researchers have concluded that competition from China caused a decrease in employment in the USA among manufacturers who faced an increase in imports. During Trump’s first presidency, his government imposed new tariffs on Chinese imports worth about $380 billion in 2018 and 2019. The Biden government maintained these contributions and increased more this year to $18 billion worth of goods. The new enthusiasm for customs duties has also spread to the European Union as it voted in early October to impose tariffs of 45% on electric vehicles from China, which in turn threatened to retaliate against European products. In the 2024 campaign, Trump argued that horizontal taxes on imports would have benefits beyond defending domestic industries: They would flood the finance ministry with billions of revenues, push companies that do not produce products in the US to do so and allow the US to extract concessions from both commercial allies and their opponents. Trump’s Democratic opponent in the election, Vice President Kamala Harris, criticized the proposed increases in his duties as a “national sales tax” that would harm consumers. She did not make her own trade agenda. How have US tariff increases affected so far? It may be difficult to classify the economic impact of the duties. They can stimulate employment by attracting investment, as companies try to circumvent customs duties by transferring factories to the country that imposes taxes. At the same time, they can cause retributions of duties that cost jobs in other sectors of the economy. In a well-evaluated document published by the National Bureau of Economic Research, it is noted that the Trump duties of 2018–2019 failed to increase jobs in the protected sectors, while damaging jobs in areas that were the target of the retaliation duties, particularly in agriculture. Economists continue to unravel the burden of inflationary effects of Trump’s original tariffs from a much greater shock to supply chains and economic activity that began shortly after the start of the US-China trade war: the pandemic. In February 2019, the San Francisco Fed estimated that tariffs add 0.1 percentage point to consumer price inflation and 0.4 percentage point to business costs for investment. Errica York, a senior economist at the Tax Foundation, estimates that Trump – Biden tariffs increase the average annual household tax bill by $625. In addition, York estimates that increases will abolish 142,000 full-time jobs and in the long term reduce long-term gross domestic product by 0.2% on average. Critics of Trump’s proposal for a drastic increase in tariffs are concerned that it will have the same effects, on a much larger scale.